Thursday, August 11, 2016

Policy confusion on Glass-Steagall from the GOP

The 2016 Republican platform’s position on Glass-Steagall is, unfortunately, a reflection of the policy confusion of the entire Trump campaign. The statement in the platform about Glass-Steagall comes at the end of a paragraph which, sensibly, attacks the growth of the regulatory state and particularly the Dodd-Frank Act. Then, seemingly out of nowhere, it adds “We support reinstating the Glass-Steagall Act, which prohibits commercial banks from engaging in high risk activities.”
A delegate studies a copy of the Republican platform at the Republican National Convention in Cleveland, Ohio, July 18, 2016. REUTERS/Jonathan Ernst.
A delegate studies a copy of the Republican platform at the Republican National Convention in Cleveland, Ohio, July 18, 2016. REUTERS/Jonathan Ernst.
There are so many thing wrong with this sentence that it’s hard to list them all in a single blog post. Here are a few:
It would make as much sense to laud the free market system and then support the reinstatement of price controls.



First, after denouncing excessive government regulation — and the Dodd-Frank Act, in particular — it makes no sense whatever to support the reinstatement of Glass-Steagall. That ill-conceived law, like all the regulations criticized in the preceding sentences of the platform, was eliminated by a Republican Congress in 1999 because it increased costs for both consumers and investors by reducing competition in the financial markets. It would make as much sense to laud the free market system and then support the reinstatement of price controls.
Second, Glass-Steagall still applies to commercial banks. The original law did two things: it prohibited commercial banks from (i) engaging in underwriting and dealing in securities and (ii) being affiliated with firms that are engaged in this business. The 1999 law only repealed the second prohibition, so commercial banks are still prohibited from underwriting or dealing in securities.
Third, even if commercial banks could engage in underwriting and dealing in securities, that activity is not “a high risk activity.” The financial crisis, for example, was the result of financial firms (including the government-backed mortgage companies Fannie Mae and Freddie Mac), including commercial banks, buying and holding risky mortgages or securities backed by risky mortgages.  Underwriting and dealing in securities had nothing to do with the crisis. The one thing we expect commercial banks to do — make sound mortgages and consumer and commercial loans — is far riskier than underwriting and dealing in securities.
Finally, although some members of the Trump campaign have suggested that reinstating Glass-Steagall would cause the big banks to break up, that’s also wrong. It would cause bank holding companies — that is, companies that control banks — to sell off their securities market operations, substantially reducing their profits and making them weaker institutions, but it would do nothing to break up the banks they control — which, as noted above, are not engaged in underwriting or dealing in securities. The largest banks, the ones that might be considered too-big-to-fail, would not be affected at all by the reinstatement of Glass-Steagall.
The point the platform should have made is that the Dodd-Frank Act, despite claims to the contrary by the administration and the act’s sponsors, has done nothing to address the problem of banks that are too-big-to-fail.
Regrettably, the Trump campaign continues to be an amateur act, nowhere more clearly shown than in its policy confusions.